Investment and M&A point to next-generation upskilling and EduTech solutions

Deal data reveals that mid-market M&A in Q3 2022 saw a 30% drop compared to the previous quarter. Technology, media, and telecoms (TMT) was no exception, registering a 40% drop, heavily influenced by continued macroeconomic turmoil.

It raises the question of whether we are experiencing a short-term drop in activity or the end of TMT’s M&A growth during the pandemic years. While rising interest rates, supply chain issues, and inflation are serious macroeconomic issues, much speaks to TMT weathering the continued disruption better than most. One reason is that their solutions and services remain core across industries, creating the efficiencies and resilience that enable companies to navigate choppy economic waters and grasp new market opportunities.

EduTech is a prime example of this dynamic and simultaneously illustrates how disruptive technologies are poised to create further market growth. The best example is artificial intelligence (AI) and the emergence of “adaptive learning” experiences.

Deal activity falls across industries

Mergermarket mid-market M&A data shows how deals activity slowed in Q3 2022.

^{Data: Mergermarket. Analysis: BDO Global.}

There were 507 deals in the year’s third quarter worth US$40.1 billion. In comparison, 2022 Q2 saw 865 TMT mid-market deals worth US$65 billion.

Private equity firms (PE) activity in the space also slowed. The third quarter total of 235 PE buyouts in the TMT space worth a combined US$17.2 billion was roughly 50% lower than the 502 deals worth US$35 billion the previous quarter.

^{Data: Mergermarket. Analysis: BDO Global}

Average TMT deal value was US$79 million, while average PE-led deal size was US$72,3 million. Both are among the lowest in recent years.

Activity was heavily influenced by on-going disruptions caused by rising interest rates, energy prices, inflation, supply chain issues, and Russia’s invasion of Ukraine. The factors all contribute to uncertainty surrounding market and earnings projections, which in turn have caused investors to slow activity.

Software sees marked slowdown

Split by industry, technology dominates TMT mid-market deal activity. However, technology sector activity almost halved.

^{Data: Mergermarket. Analysis: BDO Global}

The drop was mainly due to a slowdown in software deals. While it remains the biggest TMT deal category, it registered an almost 50% drop.

Continued macroeconomic uncertainty is the likely culprit for the drop in M&A activity. However, the situation could as likely be a pause as something more long-term.

It remains to be seen if the uncertainties represent a downward economic trend. As highlighted in BDO USA’s mid-market CFO survey, TMT solutions remain pivotal to companies creating efficiencies, innovation, and resilience that enable them to realise their full potential.

Edutech is a sub-sector that presents a microcosm of these trends and dynamics.

Upskilling and retaining talent

As BDO UK’s Tony Spillet has eloquently put it, “the pressure is on for businesses in all industries to upskill and recruit for a more tech-literate workforce.” He adds that “the global skills shortage has the potential to threaten not only the growth and prosperity of tech businesses but those across all industries.”

LinkedIn reports that 94% of employees say they would stay with their company for longer if it invested in their training and growth.

A WEF report says that half of all employees will need reskilling by 2025. Most companies can realise significant savings by reskilling employees, and educating and upskilling employees is a driver for direct revenue growth and a core, but sometimes forgotten, component of digital transformation.

With that in mind, it is little wonder that the market for employee training and education in the United States alone reached US$42.4 billion in 2020.

Simultaneously, the pandemic furthered the need to take training and education online, further speeding investments and developing new solutions – not only for employees but all types of learners.

EduTech emerges as investor darling

As a result, upskilling, and the broader EduTech sector, which includes technology solutions for all types and levels of learning, has seen rapid growth.

HolonIQ data shows almost US$21 billion of venture capital investments in EduTech in 2021, covering more than 1,500 funding rounds. New funds continue to emerge, , such as Owl Ventures’ announcement of closing US$1 billion in new EdTech capital at the beginning of the year.

^{Data: HolonIQ. Graph: BDO Global}

Investments in the space have accelerated through the pandemic. Particularly the mid-segment of investments has grown in 2020 and 2021, led by extremely strong growth in the US.

Funding rounds include Guild, an online education platform for upskilling employees raising US$175 million at a US$4.4 billion valuation. It is one of 17 new EduTech unicorns crowned in 2021.

Investor interest is linked with rapidly growing revenues and future potential. For example, upskilling alone is thought have a market size of US$370 billion.

Consolidation and investor interest set to continue

Similarly to investments, EduTech M&A activity has also seen sharp increases.

BDO Global analysis of Mergermarket data shows that Edutech deal activity more than doubled between 2019 and 2020 – and again between 2020 and 2021.

Across deals from 2017 to 2021, North America, India, China Europe, and Latin America led deal activity.

 

^{Data: Mergermarket. Analysis: BDO Global.}

Further analysis shows that private equity, EduTech companies, companies in related verticals and institutional investors are all involved in M&A moves.

It is testament to a relatively young industry, where investors see strong potential for all types of acquisitions, which include consolidation plays, bolt-on acquisitions and moves to build out geographic reach and revenues.

A prime example is PE-backed Dutch, PE-backed edutech company Paragin BV’s acquisition of science-focused edutech company Soviso to expand its offerings.[PM1] 

Strong market growth will be a contributor to continued M&A in the space, as will emerging technologies such as AI and VR-driven EduTech solutions.

Adaptive AI and VR investments set to grow

EduTech is on the cusp of a 2.0 moment. Generally speaking, EduTech 1.0 has primarily been focused on delivering content and learning experiencing through websites, texts, video and online seminars.

^{Data: Mergermarket. Analysis: BDO Global.}

Now, new technologies look set to fundamentally change how learning is structured and delivered.

Advances in mixed reality (AR and VR) means that immersive learning experiences and direct, on-the-job leaning is set to grow rapidly. 

Simultaneously AI and big data is core to EduTech start-ups working on adaptive learning, an umbrella term for AI-powered continuous adapting education material and process to specific learners thereby providing the optimal outcomes.

The potential includes teaching very advanced skills. For example, one study found that medical students taught surgical techniques by an AI-powered tutor learned 2.6x better and got higher performance scores than peers taught by human tutors.

In short, technologies like AI and VR combined can deliver fully immersive, flexible, infinitely adaptable learning experiences.

This is one of the reasons why the market for AI in education is expected to hit US$80 billion by 2030 – and by extension contribute to continued M&A activity.